Taxpayers who receive income from more than one source of employment or pension are reminded that the employees’ tax (PAYE) deducted by the respective employers or pension funds may not be enough to cover their final tax liability on assessment. The reason for this is the manner in which a taxpayer’s tax liability is calculated on assessment.
The South African tax system is based on the principle of adding together all sources of income of a taxpayer into a single sum and applying a progressive tax rate table to determine the final tax liability of the taxpayer on assessment. A progressive tax rate system means that the more income is earned, the higher is the marginal tax rate and more tax is paid on assessment.
By deducting PAYE every month, the employer or pension fund is assisting a taxpayer to pay his or her tax liability, determined on assessment, in advance. When only one employer or pension fund is involved, the total PAYE deducted monthly should be equal to the tax liability on assessment. Typically, this should result in no extra tax payable on assessment. However, where more than one employer or pension fund is involved, each of them deducts the correct amount of PAYE on only the salary or pension they each pay. When all the sources of income are added together, and the correct tax rate is applied this may result in an additional amount of tax to be paid on assessment.
The table below gives an example of how the combined taxable income is calculated in the case of a taxpayer who is over the age of 65 years and receives a salary of R280 000 and a pension of R220 000 during the tax year.
|Taxable income||280 000||220 000||500 000|
|Normal tax payable||33 171||17 571||102 036|
|Less: Tax paid in the form of PAYE withheld by employer and pension fund||33 171||17 571||50 742|
|Additional amount of tax to be paid on assessment||||||51 294|
As you can see, after submission of the annual income tax return by this individual, the total tax liability on assessment is significantly higher than the total PAYE that was correctly deducted by the employer and pension fund during the year. This results in a large amount that has to be paid in on assessment because too little tax was deducted monthly by way of PAYE.
To assist taxpayers who are in this situation, the Income Tax Act allows a taxpayer to make additional voluntary tax payments. Taxpayers receiving a salary or pension may make a written request to one or more employers and pension funds to deduct additional monthly PAYE. A provisional taxpayer may instead pay a higher amount of provisional tax.
In this way a taxpayer is able to reduce the additional amount of tax payable when the annual income tax return is assessed.
Tax is inevitable, and unfortunately, the more you earn, the higher your tax liability. It is important to keep track of all income streams and make provision for any “short payment” in tax.
If you require any assistance in calculating your aggregate tax liability, or need clarity on the abovementioned, please feel free to contact Kirsten Mitchell:
Office: 011 514 0840